Attorney General Calls HFT Advantages "Insider Trading 2.0"

Attorney General Eric T. Schneiderman spoke to a packed auditorium at the New York Law School today on "insider trading 2.0." He called for tougher regulation and support in curbing the unfair advances given to high frequency trading firms, arguing they contribute little value to the market and operate at the expense of traditional investors.

A decade ago high frequency trading was barely more than a concept, but in that quick passage of time many examples of favoritism by institutions towards algo-traders have been questioned by regulatory authorities.

These services include special premium options like higher bandwidth, millisecond to full second advantages, and access to ultra fast connection cables and collocation benefits. Schneiderman takes the position that these benefits help guarantee lower risk and higher returns, and distort the market for other traders.

In some cases the Attorney General's office has stepped in to eliminate the advantage. In one example last fall, the office obtained an agreement from Thomson Reuters to end sales of a two second advanced viewing of survey results, only offered at a premium to high frequency traders.

By law, the information must be made available to all at the same time. Schneiderman believes this practice continues in other avenues. Without the passage of a sweeping legislation, regulators can only continue to seek case by case agreements.

“Rather than curbing the worst threats posed by high-frequency traders, our markets are becoming too focused on catering to them,” said Attorney General Schneiderman in his speech. “I am committed to cracking down on fundamentally unfair – and potentially illegal – arrangements that give elite groups of traders early access to market-moving information at the expense of the rest of the market. We call it Insider Trading 2.0, and it is one of the greatest threats to public confidence in the markets. It’s long past time that we focus on structural reforms to help eliminate the unfair advantages enjoyed by high-frequency traders.”
Becca Lipman is Senior Editor for Wall Street & Technology. She writes in-depth news articles with a focus on big data and compliance in the capital markets. She regularly meets with information technology leaders and innovators and writes about cloud computing, datacenters, ... View Full Bio

Of couse a portion of Schneiderman's campaign can be attributed to politics and the publicity seeking nature of the NY AG's office (see Andrew Cuomo, Spitzer). But many of the questions that Schneiderman is raising have been flying around for years...most remain unanswered, or only answered by someone with a vested interest in the outcome. I don't know if Schneiderman's push will actually improve/change anything, but the focus can't hurt in the long run.

He has put pressure on service/technology providers to stop providing high-speed customers with an early look at market moving information. I assume the industry is taking this seriously, as no one wants to be his next target. He is raising important questions about elite groups of traders that have early access to information as being unfair, but so far the regulators have not objected. If there is a blow up in terms of insider trading 2.0, that would be a different story.

In the current environment I don't think the public -- or politicians (especially publicity-loving officials like the NYAG) -- is too keen on letting the industry players police themselves. Perhaps what the industry needs to do is take Schneiderman seriously and apply some meaningful controls and monitoring on HFT to try to forestall the kind of blow-up that inevitably would lead to tougher regulation and restrictions.